A Christmas Carol – with apologies to Charles Dickens

The recent Good Returns interview with my ex-Sovereign colleague, Naomi Ballantyne, featured, among other items, the subject of client “ownership”.

This put me in mind of Dickens’ haunting literary piece featuring the ghosts of Christmas past, present, and future – with deepest apologies to aficionados of the great writer wherever you are.

The Ghost of Christmas Past

I used parenthesis around word “ownership” above because – unless I’ve misread the history of the abolition of slavery – nobody “owns” anybody else in contemporary society.

The concept of client ownership arose originally in support of the notion of vesting rights – the right of the initiating Financial Adviser to the ongoing commission generated as long as a life policy remained in force.

Insurance companies’ marketing initiatives and other measures beyond the required annual statement of benefits and costs were at the discretion of the intermediary.

This management function served as a filter against the aggressive marketing practices of some product providers attempting to by-pass the IFA and cajole the consumer into purchasing sub-standard and wholly inappropriate products, frequently unsuited to the clients’ circumstances. In this capacity, the intermediary introduced redress for the “information asymmetry” between consumers and insurers – providing the intermediary was acting on behalf of the client and not the product provider.

Attaching these vesting rights assisted Sovereign’s entry into the NZ market in 1989 and were relevant, valuable, and effective at the time. While many may regret the passing of this aspect of agency agreements, contemporary reality suggests that consumer sovereignty now prevails.

All those policies accrued over the years, and all the ongoing renewal commissions, are no longer within the exclusive purview of the IFA and the product provider. This, of course, has implications for valuation of an IFA business and seems inevitable - more ‘when’ than “if”.

The ‘when’ is likely to occur as grey-haired advisers seek to exit, or as other IFAs find the new world too brave for their liking.

Whatever the reason, there is likely to be a significant number of ‘books of business’ on the market over the coming years, with purchasers applying robust due diligence, being selective, and looking for those businesses that offer as close an alignment as possible with their own business model.

Vesting rights, overseas incentive trips, and volume-based override commissions are now truly buried and consigned to the graveyard of history – the Ghosts of Christmas Past.

The Ghosts of Christmas Present

The apparent requirement for providers to take more responsibility for the solutions provided by Independent Financial Advisers (IFAs) has given rise to issues perhaps not contemplated by the authors.

Involving providers in the advice process is inappropriate as the FSLAA and the Code of Conduct provide for IFA responsibility and liability in this regard.

For the purposes of this tale, Nominated Representatives or other similar types of tied agents are ignored as there is no question over client ‘ownership”.

What is appropriate is the oversight and monitoring of the patterns of behavior and conduct recorded in the agency statistics of the various product providers deployed by IFAs in the market.

I use the term ‘inappropriate’ in the context of practicality, expense, and resource, as product providers have neither the expertise, the budget, nor the time to duplicate the function of the financial adviser without adding considerable cost to their General Operating Expenses.

Imagine that an Adviser – CFP, CLU, level 5 qualified in risk, lending, and investment - has a self-employed client who requires risk, investment, lending, and Kiwisaver advice. Taking into account all relevant circumstances, the Adviser recommends, Life + TPD Cover with Partners Life, Trauma cover with AIA, Loss of Income cover with Asteron, arranges a mortgage protected by a Fidelity Life policy, arranges a balanced growth asset allocation strategy to invest the $250,000 inherited lump sum with appropriate Fund Manager (four?) diversification, and a balanced Growth Fund Kiwisaver with Booster.

This means that there are nine different product providers involved in the total advice solutions recommended for this client.

• Is it proposed that all nine providers are to be involved in the monitoring and oversight of the specific advice processes in such a case?

• Is it proposed that all nine product providers should have mandated rights to send offers, marketing material, etc., to the client directly?

• What useful purpose can any of the product providers serve in ‘checking’ the advice provided by a suitably qualified adviser?

However, identifying inconsistencies at an agency level which deviate from standard patterns of production, lapse, and/or claim, offers a pathway to sensible and practical monitoring of conduct as outlined in the various relevant documents issued by FMA and MBIE.

In the absence of practical common sense, these Ghosts of Christmas Present are set to rattle the chains of many stakeholders, cause many to have sleepless nights haunted by the spectre of over-regulation.

The Ghosts of Christmas Yet to Come

As we look forward to the Brave New World (if you’ll forgive mixing the Dickensian metaphor with Huxley) I anticipate a healthy number of transitional licenses being issued and that when the reality of the cost of obtaining – and maintaining – a full license hits home, those numbers will reduce substantially.

Economies of scale will begin to appeal to the smaller entities and there will be considerably fewer – but likely larger - licensed entities as the months and years roll by.

This rationalisation trend will see commercial adviser entities developing strategies based on sustainability, balance sheet value, and long-term horizons.

Adviserland will continue to be the subject of constant change and the first signs of educational standards going beyond the current NZQ5 level will be promulgated. This will herald the initial steps to approaching the FASEA regime in Australia – at least in the investment space at this stage.

With FSLAA implemented by mid-year and full licensing in play, there will be plenty of “Ghosts” haunting the shape of Christmas 2020 – and beyond.

While the legislative review has been exhaustive (and exhausting), it’s highly likely that there will be ongoing amendments – perhaps not of a legislative nature – but the extensive discretionary powers afforded to the regulators will see more changes arrive in the months and years ahead.

But rather than end in a somewhat pessimistic note, let’s remember that Ebenezer Scrooge, confronted by the Ghosts of Christmas Past, Present, and Future, saw the light and became a better, kinder, more generous, and more tolerant person.

Let’s carry Ebenezer’s learnings through our Festive Season into the New Year and may you and yours have a safe, happy and enjoyable Christmas followed by an outrageously enjoyable and prosperous 2020.

The Laird